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A 1031 exchange offers various advantages:
Deferred capital gains taxes: According to tax law, a 1031 exchange allows you to defer capital gains tax by rolling over the equity from a property sold into another like-kind investment property.
Diversify investment and business property: Utilizing a 1031 exchange allows investors to upgrade or diversify their investment portfolio by selling one property and reinvesting the proceeds into a replacement property.
Increased cash flow: An investor may sell a highly appreciated property that does not generate much income and reinvest the proceeds into a property with lower value, which produces higher rental income.
More control over tangible property pricing: In a reverse exchange, the timing of a sale and purchase can be controlled so that an investor can buy a property before selling their relinquished property. This would allow them to take advantage of a decrease in the real estate market.
Multiple residences: Many investors who take advantage of 1031 and like-kind exchanges will own several properties. Often, they will have at least three properties: their primary residence, a beach house or vacation home, and one property obtained strictly for investment purposes, like an apartment building, strip mall, or other revenue-generating location.
A 1031 exchange is known by many names, such as a like-kind exchange, Starker exchange, or simply, 1031. No matter what you call it, the general requirements for a 1031 exchange are the following:
The investment or business property that is exchanged must be held for commercial or investment use (i.e., a rental property or a vacation property).
The exchanged properties must be "like-kind." Like-kind property is defined as qualified personal property of similar nature and characteristics.
Only the qualified intermediary can receive the proceeds from the sale of the relinquished property.
Although the 1031 exchange applies to most investment properties, you cannot use it on stocks, bonds, trust certificates, and partnership interests. Because of this, you will mostly encounter 1031 on real estate properties.
Get in touch with our qualified financial and real estate experts to learn more about how to get started with a 1031 exchange. Browse our extensive library of resources about the 1031 process, DST, and TIC investments.
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Jon Paul Cirelli is a registered representative of Coastal Equities, Inc., and are Investment Advisor Representatives of Coastal Investment Advisors, Inc., a US SEC Registered Investment Adviser. Neither Coastal Equities, Inc., nor Coastal Investment Advisors, Inc., is affiliated with Pivot Professional Partners. Securities are offered through Coastal Equities, Inc. Member FINRA/SIPC, Advisory services are offered through Coastal Investment Advisors, Inc.
Coastal and CoastalOne are trade names for the Coastal Companies. The Coastal Companies are Coastal Equities, Inc., Coastal Investment Advisors, Inc., a US SEC Registered Investment Adviser and Coastal Insurance Services which is made up of several affiliated insurance agencies, co-located at 1201 N. Orange Street, Suite 729, Wilmington DE 19801
Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor.